Investing in the Sensex funds can be a profitable option for an investor looking to take a plunge into the Indian stock market. These funds use the BSE Sensex, which constitutes the 30 top companies listed on the Bombay Stock Exchange.
Nevertheless, before investing your best efforts, it is important to comprehend the different primary measures that are instrumental in making intelligent investment choices.
This blog will discuss the relevant metrics and other factors that ought to be put into consideration before considering investing in these funds.
Top 5 Metrics to Consider Before Investing in Sensex Funds
Let’s explore the top metrics to consider before investing in these funds:
1. Understanding the BSE Sensex
Before attempting to analyze any particular metrics, it is important to understand first the essence of the BSE Sensex index. The BSE Sensex is a market capitalization-weighted index, which means that larger companies, in terms of their market cap, tend to exert a greater influence on their performance.
The BSE Sensex also includes companies coming from a wide variety of industries like banking, information technology, fast-moving consumer goods, and health care.
Understanding this sector representation assists you analyze how healthy the economy is as well as the possible threats displayed by specific sectors.
Not only this but also an analysis of the past performance of the BSE Sensex is useful in determining performance trends of the index history in different market situations.
2. Expense Ratio of Sensex Funds
The expense ratio is one of the most important measures as it demonstrates the annual fee a fund levies to manage your investment. This figure depicts the percentage of your investment that will be used to pay for management services and operational expenses, which in turn affects the returns you earn.
Lower expense ratios are considered to be better because they mean that more profit from the investment would be retained by the investor. Nevertheless, it is important to compare the expense ratios of various Sensex funds, as some of them might have a low-priced structure while performance and management suffer.
3. Fund Performance Relative to the BSE Sensex
Evaluating the performance of a Sensex fund against the BSE Sensex is an important metric for investors. Tracking error which determines how close the fund performance to the BSE Sensex is, is another important factor.
Low tracking error means closer performance of the fund to the index making it a safer fund to invest in. In addition, it is also important to look at the long-term performance of the fund in relation to the index.
If a fund has managed to beat the index over the years or if its performance has been in line with the index, then the management of the fund is usually assumed to be intelligent and the investment process quite sound.
Another important aspect is to look at risk-adjusted returns by considering the Sharpe Ratio among other ratios, which looks at the returns earned by the fund relative to the amount of risk taken.
4. AUM (Assets Under Management)
The Assets Under Management (AUM) of a fund is another essential metric to evaluate before investing in these funds. A higher AUM often reflects investor confidence in the fund’s management and strategy.
However, it is essential to be cautious; too high an AUM may indicate limited growth opportunities, particularly in actively managed funds, where a large pool of assets can make it challenging to maneuver quickly.
Moreover, funds with larger AUM typically have better liquidity, allowing for easier entry and exit when trading shares. This liquidity can be especially crucial during volatile market conditions when quick decisions may be necessary.
5. Fund Manager’s Track Record
The expertise of the fund manager plays a significant role in the performance of these funds. Evaluating the fund manager’s experience in managing these funds and their overall investment strategy is critical.
A seasoned manager with a proven track record can significantly impact the fund’s success. Additionally, looking at the historical performance of the fund manager’s previous funds can provide insights into their ability to navigate market challenges and generate returns.
Final Words
Investing in these funds can be an effective way to capitalize on the growth of the Indian economy. However, it’s essential to evaluate key metrics before making investment decisions. Equip yourself with the right information, and you’ll be better prepared to navigate the investing in Sensex funds.
